Czech Economy and Monetary Policy

Transcription

1 Lunch with the Czech National Bank Czech Economy and Monetary Policy Vojtěch Benda CNB Board Member London, 21 May 2018

2 Outline and main messages Czech economy: robust growth, tight labour market. Inflation: strong domestic pressures, antiinflationary import prices. Monetary policy: strengthening of monetary conditions envisaged via both channels. What will determine further steps? 2

3 Economic growth is robust GDP growth forecast (annual percentage changes; seasonally adjusted) Economic growth will continue to be supported by robust consumption of Czech households, strong domestic investment activity, external demand (but contribution of net exports will be negative in 2018 due to stronger CZK and higher imports). Growth of Czech economy will slow compared to last year, but it will still exceed 3%. Czech economy will grow in line with its potential growth, output gap will remain slightly positive. 3

4 Aggregate demand growth forecast Annual percentage changes GDP Household consumption Government consumption Gross capital formation Gross fixed capital formation Exports of goods and services Imports of goods and services

5 Structure of investment Investment by sector Investment by type of capital I/13 I/14 I/15 I/16 I/17 Machinery and equipment Buildings and structures Intellectual property Cultivated resources Transport equipment Dwellings Gripen Gross fix. capital formation (annual percentage changes; contributions in percentage points; constant prices; seasonally unadjusted) Upswing in investment is fostering labour efficiency (fast investment in machinery and equipment continues). Investment growth is being driven by non-financial corporations; government investment also increased in Q Surveys suggest continued solid growth in private investment in quarters ahead. 5

6 Fiscal policy o Government surplus will reach 1.5% of GDP in both 2018 and 2019, along with persistent structural surpluses. o Growth in tax revenues due to continued economic growth and policy measures are significantly contributing to increasing government budget surpluses. o General government debt to GDP ratio is predicted to continue decreasing to 30.1% in

7 Fiscal impulse o Fiscal policy will remain expansionary in 2018 and o 2018: measures supporting household consumption (including high wage growth in government sector), recovery in government investment. o 2019: increase in old-age pensions and continuous growth in government investment. Contributions to GDP growth in percentage points actual actual forecast forecast Fiscal impulse of which impact through: private consumption private investment government investment, domestic government investment, EU funded

8 Labour market is at its capacity LUCI labour utilisation composite index Beveridge curve I/02 I/04 I/06 I/08 I/10 I/12 I/14 I/16 Vacancies Number of employed LUCI Number of unemployed Others Note: Index; vertical axis shows standard deviations. Czech labour market is now extremely tight. Continued economic growth is leading to further rise in employment; unemployment rate is lowest in history. Firms are finding it increasingly difficult to fill vacancies. 8

9 Wage pressures have been peaking Tightness in labour market will keep wage growth in market sectors at high levels this year. Pay increase in government sector in November 2017 is assumed to be one-off. Wages will then slow, but their growth will remain above its assumed long-run equilibrium 5% level. Average nominal wages (annual percentage changes; total wages source: CZSO; wages in market and non-market sectors source: CNB calculation) I/13 I/14 I/15 I/16 I/17 I/18 I/19 Nominal wages, total Nom.wages in market sectors Wage growth picked up further at start of this year (including further increase in minimum wage). Gradual slowdown in quarters ahead, mainly due to tightening monetary conditions and firms efforts to maintain price competitiveness. Nom. wages in non-mark.sectors 9

10 Inflationary pressures in economy Overall inflation pressures remain relatively strong despite antiinflationary effect of import prices. Domestic cost pressures are peaking in H1 2018, reflecting rapid growth of economy and wages. From Q they will gradually ease. Contribution of import prices will turn positive again during Costs in consumer sector (nominal quarterly percentage changes; contributions in percentage points; annualised) I/13 I/14 I/15 I/16 I/17 I/18 I/19 Import prices Intermediate goods prices Price convergence Total 10

11 Inflation developments Consumer price slowdown in early 2018 driven by markedly lower growth in food prices and decline in core inflation. Core inflation decline: slower growth in nontradables prices (including fading out of oneoff effects from 2016/2017 and slowing imputed rent dynamics), tradables prices affected by import price decline. 11

12 Inflation forecast: sustainable fulfilment of target Inflation will be in lower half of tolerance band and return to target by end of CZK appreciation will continue to slow down inflation in In 2019, import prices will support return of inflation to target from below. Core inflation will remain broadly stable in near future and go up next year Headline inflation forecast (year on year in %) Inflation target Monetary policy horizon -1 II/16 III IV I/17 II III IV I/18 II III IV I/19 II III IV 90% 70% 50% 30% confidence interval 12

13 Exchange Rate According to forecast, koruna will appreciate further against euro, especially in 2018, due to positive interest rate differential and long-term real convergence to euro area. In 2019, CZK will appreciate much more modestly: gradually slowing growth in external demand and ECB s expected return to conventional monetary policy. Exchange rate forecast (CZK/EUR, quarterly averages) CNB renewed publication of numerical CZK/EUR forecasts. Fanchart form = emphasis on uncertainty and noncommittal character of trajectory. 13

14 Interest rate path Consistent with forecast is broad stability of market interest rates initially, followed by further growth in rates from late 2018/early Continued very accommodative monetary policy of ECB will remain main barrier to faster increase in domestic interest rates. Interest rate forecast (3M PRIBOR in %) Tendency towards rate normalisation vs. ECB quantitative easing. 14

15 Monetary conditions Monetary conditions tighten in their exchange rate component and later also in their interest rate component, thus acting against overheating of domestic economy. Real monetary conditions index (positive values refer to easy monetary conditions and negative values to tight monetary conditions; CNB calculation) I/04 I/05 I/06 I/07 I/08 I/09 I/10 I/11 I/12 I/13 I/14 I/15 I/16 I/17 I/18 I/19 Exchange rate component Interest rate component Basic RMCI 15

16 Current monetary policy setting CNB Bank Board monetary policy meeting on 3 May 2018: Bank Board assessed risks to forecast as being balanced at monetary policy horizon. 2W repo rate remained at 0.75%, discount rate at 0.05% and Lombard rate at 1.50%. Main uncertainties: strength and composition of inflation pressures, exchange rate developments, developments abroad. 16

17 Sensitivity scenario labour efficiency Scenario: current forecast for wage dynamics accompanied by lower/higher labour efficiency growth slightly higher/lower inflation, higher/lower trajectory of interest rates, lower/higher GDP growth outlook. 17

18 Sensitivity scenario exchange rate Standard sensitivity scenario: temporarily weaker/stronger exchange rate higher/lower interest rate path compared to forecast. 18

19 Monetary policy normalisation so far: four steps FX commitment terminated in April First step towards MP normalisation. Interest rate increases followed three times so far. % 5 CZK/EUR and monetary policy interest rates 30 4 CZK/EUR (right axis) 28 3 FX commitment (27 CZK/EUR) Lombard rate 2W repo rate Discount rate /08 01/09 01/10 01/11 01/12 01/13 01/14 01/15 01/16 01/17 01/

20 Analysis of fulfilment of inflation target External shocks most important continuous source of negative deviations from target over last two years. Aggregate effect of domestic economy started to drive inflation above target at end Monetary policy and only gradual appreciation of CZK have offset anti-inflationary external pressures in recent quarters Deviations of monetary policy inflation from 2% target (percentage points) II/16 III/16 IV/16 I/17 II/17 III/17 IV/17 I/18 External shocks Price-costpush shocks Demand shocks Exchange rate shocks Other factors Shocks to administ. prices Wage-costpush shocks Supply shocks Monetary-policy shocks Total deviation inflation above target inflation below target 20

21 Quick analysis of MP transmission Monetary policy rates are passing through to financial market rates as usual. Growth in MP rates is also gradually passing through to client interest rates, mainly loan rates: most apparent for corporate loans; transmission to house purchase loans is slower; deposit rates remain very low. Banks interest margins remain low, but margins on corporate loans and house purchase loans have risen slightly recently Monetary policy and financial market interest rates (percentages) 0 1/06 1/08 1/10 1/12 1/14 1/16 1/18 2W repo rate 3M PRIBOR 1Y PRIBOR 5Y IRS 10Y government bond yield Interest rate on mortgages and household deposits (percentages) /06 1/08 1/10 1/12 1/14 1/16 1/18 2W repo rate Interest rate on overnight deposits New deposits with agreed maturity 10Y government bond yield Interest rate on mortgages 21

22 Credit market developments Growth in loans to private sector picked up slightly to 8% at start of this year Growth in loans to corporations rose to around 6% on back of favourable credit conditions and economic growth. Growth in loans to households has recently slowed but remains buoyant tightening of credit standards combined with high property prices is slowing down growth in loans for house purchase. Loans to private non-financial sector (annual percentage rates of growth) -2 1/13 1/14 1/15 1/16 1/17 1/18 Credit standards of banks (net percentages of banking market; positive value = tightening, negative value = easing) I/13 I/14 I/15 I/16 I/17 I/18 Loans to non-financial corporations Loans for house purchase Consumer credit Loans to non-financial corporations Loans for house purchase to households Consumer credit to households 22

23 Summary Czech economy is operating at its potential. Inflation slightly below target in 2018, will return to target during Monetary policy is facing strong domestic inflationary pressures, while external factors are exerting downward pressure on rates. Monetary strengthening is being achieved via both channels. Consistent with recent CNB forecast is initial broad stability of market interest rates and gradual growth in rates in the direction towards their long-run neutral level from late 2018/early

24 Thank you for your attention Vojtěch Benda CNB Board Member 24

25 Forecasts of selected variables actual forecast forecast Headline inflation GDP Average nominal wage Exchange rate (CZK/EUR) M PRIBOR (in %)

26 External Environment Outlook GDP growth in effective eurozone will remain robust and is revised upwards. Producer price dynamics will fluctuate around 2%. Continued easy monetary policy of ECB keeps outlook for 3M EURIBOR in negative territory until end of USD/EUR outlook is above